The Blog

July 28, 2017

Subscription economy’s maturation

A lot happens in a decade. Bill Gates, among others, once said that we over estimate what we can do in two years and underestimate what we can do in ten. 2017 is a particularly good time to stop paddling and look back at what’s been going on in the last decade and while we will all have our favorite memories, there’s one in CRM that stands out more for me than others.

After all 2007 was the year of the iPhone as well as the year before everything in the financial world began going down in a big way. There was barely any social media to speak of—Facebook was founded in 2004 but only in 2006 could anybody over the age of 13 join. Twitter was founded in March of 2006 but while social was making waves in 2007, the introduction of the iPhone helped make it the huge part of our lives it is.

But as one who has been writing about CRM and especially SaaS, 2017 marks the tenth anniversary of Zuora’s founding. You might think that wasn’t significant but just as the iPhone made social networking a big deal, Zuora had a similar effect on the SaaS business. Sure there were already big companies like Salesforce.com in the space by 2007, they’d even gone public a few years before.

But there was a looming problem in SaaS that was either being ignored or avoided, and it was creating drag on the whole industry. The problem was that although SaaS businesses were successful, they were scrambling each month to get their billing out. In 2007 even the best SaaS companies were using a combination of spreadsheets and archaic ERP systems that couldn’t fathom the idea of a recurring charge. ERP could do services but not the recurring part and spreadsheets aren’t systems, at best they’re the equivalent of life vests for business processes.

So along came K.V. Rao, Cheng Zou and Tien Tzuo, veterans of WebEx and Salesforce to tackle the problem. I am not certain if Zuora was the first company of its kind, but it certainly put a floor under the industry in a way that competitors didn’t. That floor looked a lot like Salesforce. When Salesforce got started subscriptions were thought to simply be another delivery mechanism for software and not the revolution they turned into.

Similarly, Zuora didn’t simply approach the subscription billing problem as, well, a billing problem. Zuora saw a revolution in the making and not just in software as a service. They saw subscriptions as a new economic entity, a way to bend the cost curve downwards that would expand markets by vastly increasing demand. Importantly, though, the subscription difference has been that while markets expanded they did not necessarily commoditize, which might have been the first time in history that’s happened.

Under more normal conditions that have prevailed throughout history, commoditization involved elements of mass production as well as finding ways to cheapen a product. Mass production takes labor out of making something reducing costs. Cheapening products can take many forms, for instance, you can remove features or substitute materials or components in the process shortening the product’s useful life. You can also curtail services, which are expensive to provision when using employees rather than systems.

Until subscriptions, that was the reality of commoditization but by their nature, subscriptions do none of that. The same grade of product delivered as a service is available to all, though the current reckless actions by the FCC to degrade net neutrality may be a retrograde step in the direction of cheapening the Internet. Everyone also pays the same base price though there’s still opportunity for creativity when it comes to volume discounting. Most importantly, development and maintenance in many subscription industries are ongoing and if they aren’t, like when you subscribe to a car through a lease, at least the service level remains high. The reasons are all the same, subscription vendors are always in the hunt for the renewal.

Zuora saw subscriptions as the revolution they are and that’s one reason they’re one of Silicon Valley’s unicorns, a startup worth more than a billion bucks on paper. Undoubtedly, we’ll see that valuation tested at some point through a public offering but for now it’s worth recalling that the revolution is continuing. U.S. and international financial accounting boards that set standards for how businesses report their financial activities have recently (after more than a decade) announced standards for how businesses report on recurring revenue, which goes to the heart of the industry.

The new rules ASC 606 (U.S.) and IFRS 15 (Europe) begin going into effect next December. As I’ve written previously, Zuora has acquired Leeyo a revenue recognition specialist company to prepare its customers for the transition. It’s not the first acquisition for Zuora, which has been steadily innovating and acquiring businesses as needed to build out its platform and support the subscription economy.

Zuora has come a long way since its founding ten years ago but so has the industry, so have we. Gate’s original insight should probably be amended because not only do we underestimate what can be done in a decade, we absorb new technologies so fast that a decade can cause amnesia about the way things were just a short while ago.